The Successful Rebuild

On Wednesday, Forbes published their annual ranking of MLB franchise valuations, completed with individual breakdowns of revenue, operating income, and additional franchise details. The Brewers details are available here, and, like 2016, the Brewers are once again quite a successful MLB team. Prior to interest, taxes, amortization, and depreciation, Forbes estimates that the Brewers ownership group pulled in $67 million in operating revenue. It must be noted that there are questions about the Forbes estimates, especially given that MLB teams run their books with an opacity that would make even Wall Street firms blush. Of course, it stands to reason that once depreciation, taxes, interest, and amortization are taken into consideration, the Brewers are probably left with a slice of revenue that does not look all too different from that $67 million figure (after all, consider the types of depreciation the club can take on Miller Park and its Arizona facility, in comparison to their tax burden; I am fairly confident that Mark Attanasio didn’t get to this point in his career without accountants that can minimize a firm’s tax burden). Anyway, questions aside, it is worth noting that this valuation system viewed the 2017 Brewers revenues as increasing 12 percent from their previous estimate.

What is particularly interesting about the Brewers’ overall franchise valuation leap, which sees the club crack the $1 billion mark, is that Forbes viewed the club as one of the most dramatic one-year franchise value changes in MLB:

Additionally, Rob Mains scrutinized the Forbes analysis at Baseball Prospectus, adding long-term analytics such as Compound Average Growth Rate. In Mains’s estimation, the Brewers leap from their standing as a bottom third organization (in terms of overall franchise value) into the solid middle tier of the league in terms of their consistent annual return. Mains estimates that Attanasio’s group could have spent approximately $16 million in additional revenue each year of ownership and still maintained an 8 percent return on investment. Coming from a 1,055-1,064 (.498) tenure as owner one wonders whether $224 million could have found a useful place in Brewers blue.

Rebuilding as Capital Expansion
While most Brewers fans view the rebuilding efforts of the club as a baseball operation, leaving debates to the details of whether or not the club should have “tanked” or whether they went far enough in stripping down the MLB roster, the rebuilding efforts can also be viewed as a capital expansion for the club. Witness the Miller Park renovations entering 2017, the 2017 purchase of the Carolina Mudcats (and alleged rumors about further minor league ownership talks), and the upgrade of their Arizona facilities as three key examples of capital expansion for the ownership group. What is most interesting about these purchases and renovations is that they need not represent uses of the operating revenue listed above; through the magic of debt finance, the Brewers can leverage their position of financial strength and arrange partnerships or loans (or both) that allow them to continue their stream of fantastic revenue flows and increase those flows (by adding minor league teams, improved facilities, and better concessions at Miller Park).

It is worth questioning how Forbes considered these elements of the club in assessing franchise value. Given the Brewers’ control of the Carolina Mudcats (and presumably more routes to depreciation and other financial benefits) and additional streams of revenue in Arizona and Milwaukee alike, the growth figures already exhibited by the club could be on the “low end” of the club’s valuation. Would anyone be surprised if Mark Attanasio and his ownership group sold the Brewers for $1.3 billion or more? The Miami Marlins were able to fetch a 28 percent increase over their Forbes valuation in an awful financial situation, which leaves one wonder whether even a $1.3 billion price is low for the Brewers.

The rebuild is an unmitigated success for Mark Attanasio’s ownership group. Since GM David Stearns did go quite far in stripping the club’s roster, the Brewers have opened a five year contention window with precious few guaranteed contracts on the books. According to Cot’s Contracts, the highest collection of guaranteed contracts that Milwaukee is obligated to pay from 2019-2023 is around $66 million (entering next season). Granted, a set of contract extensions (10 years / $200 million for Orlando Arcia, please!) signed during the 2018 season could increase the long-term contractual burden for Milwaukee, but the point is, it is not a necessity. Stearns has shown an ability to shrewdly acquire low cost talent (Manny Pina, Jonathan Villar, Keon Broxton, Oliver Drake, Junior Guerra, even [arguably] Chase Anderson), and a preference for turning “big” money into smaller money even when it’s not necessary to improve the club (witness the Jett Bandy for Martin Maldonado trade). It would be interesting to know the extent to which Attanasio and Stearns discuss the financials of the team; one wonders whether Stearns is an explicit member of the Attanasio ownership expansion efforts, or an unwitting participant (in which case I certainly hope Stearns asks for his fair cut, soon). Perhaps the former case explains why Stearns’s contract details were never released.

Where does Attanasio go from here? It is difficult to argue that Attanasio needs to spend simply for the sake of spending. For one, even in this offseason’s depressed market, there were some highly praised players that signed poor contracts (see Lance Lynn, whose $19 million three-year surplus value turned into a one-year, $12 million contract, or Alex Cobb, who spun $14 million surplus value into a $57 million contract). It is difficult to argue that either pitcher would have markedly improved the Brewers for their given prices. Contrary to popular belief, both are bad contracts. In terms of the big contracts handed to Yu Darvish and Jake Arrieta, one can question their strengths, but it cannot be argued that the Brewers did not have room to sign either ace; Milwaukee’s opening day payroll of $91 million is currently operating at approximately 75 percent of their realistic payroll ceiling. Of course, the Brewers ownership group has no mandate to spend money on the field, certainly not under the Manfred regime.

Additionally, there’s a legitimate sense that so long as the MLB operates without true revenue sharing across markets (a la the National Football League), a club like Milwaukee is arguably better off with a flexible payroll. Given that even the Brewers’ strongest realistic 2018 payroll was two or three elite contracts below the MLB luxury tax threshold, there is no way that Milwaukee can seriously maintain a set of high roller commitments like their closest division rival to the south. In fact, if the Brewers maxed out their realistic payroll between $115 to $120 million in 2018, twenty MLB teams would still have higher opening day payrolls; adding in MLB Advanced Media Revenue and assuming a wild $140 to $150 million figure would barely crack the top ten. The reality is that anyone complaining that Brewers ownership is uncommitted to winning because of their low payroll would have the same material facts even if the Brewers paid their highest realistic payroll entering the season.

In a strange way, $91 million feels just right for this club, and not simply because that figure represents a 15 percent increase over the 2017 year-end payroll.

The Brewers are stuck in a strange place as an organization. Financially, Milwaukee is as solvent and successful as ever, positioning the team as a true “grower” within the MLB. Yet, even given the robust MLB revenue landscape, the Brewers are working with relative scraps. Still, it is difficult to see the club undergo a rebuilding process and endure losing seasons while racking up fantastic operating revenue positions, expanding capital spending, and continuing to spend below their most realistic payroll ceiling. There is no happy middle ground here for the Brewers: they scrapped an MLB roster to shift labor costs away from the big league roster and toward the minor league rosters, which also effectively drained revenue from the players and tilted it toward ownership. But, that’s what ownership does, and even within this environment, Attanasio cannot claim to have a *rich* club. One can only hope that this swirling set of circumstances for the small-but-growing franchise corresponds with winning on the field.